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Supreme Court’s sales tax ruling makes case for Md. drug-price controls, Frosh says

Generic-drug industry calls justices' ruling irrelevant to Maryland law

Attorney General Brian E. Frosh. (File)

Attorney General Brian E. Frosh. (File)

The U.S. Supreme Court’s decision last week permitting states to impose sales taxes on online purchases should save a legally embattled Maryland law aimed at preventing excessive price increases by the generic-drug industry, according to the state attorney general’s office.

But a lawyer for the industry countered Monday the high court’s tax ruling in South Dakota v. Wayfair Inc. does not affect the constitutional prohibition on states regulating out-of-state transactions.

The dueling messages were sent to the full 4th U.S. Circuit Court of Appeals as it considers whether to review a three-judge panel’s 2-1 ruling in April that the 2017 Maryland law directly regulates the price of generic-drug transactions that occur outside the state in violation of the Constitution’s Commerce Clause, which leaves such external state regulation to Congress.

The justices held in Wayfair that a state can constitutionally impose a tax on online sales even when the business lacks a “physical presence” in the state.

Maryland, likewise, has the constitutional authority to regulate the price of drug transactions occurring outside the state – or “extraterritorially” – but which affect prices within the state, Assistant Maryland Attorney General Joshua N. Auerbach wrote in a letter Friday to the 4th Circuit.

Wayfair’s abandonment of the ‘physical presence’ rule undermines the extraterritoriality theory adopted by the panel in this case,” Auerbach added. “In holding that Maryland may not protect its consumers from unconscionable increases in the price of essential medicines if those increases are imposed in wholesale transactions occurring geographically out of state, the majority erroneously circumscribed state regulatory authority based on the physical location of those upstream transactions.”

But industry lawyer Jay P. Lefkowitz stated in his response letter that “the attorney general must have read Wayfair too hastily,” as the sales-tax ruling is unrelated to Maryland’s law regulating generic drug prices.

Wayfair pertained to direct sales between a business and a state resident, albeit online, whereas the Maryland law regulates wholesale prices set outside the state and which only indirectly affect in-state prices, added Lefkowitz, of Kirkland & Ellis LLP in New York.

“The question (in Wayfair) was whether states may require a retailer with no ‘physical presence” in the state to collect and remit state sales taxes when the retailer sells goods directly to consumers in the state,” Lefkowitz wrote. “That a state may require retailers to collect and remit taxes when a retailer sells directly to in-state buyers – i.e., when a transaction does take place in the state – obviously does not mean that a state may require manufacturers to charge certain prices in their transactions that do not take place in the state.”

The 4th Circuit has not said when it will respond to Maryland Attorney General Brian E. Frosh’s request for full-court consideration of the case, Association for Accessible Medicines v. Brian E. Frosh et al., No. 17-2166. The losing party in the 4th Circuit will likely seek review by the Supreme Court.

The law, which went into effect Oct. 1, prohibits a significant price increase of an essential off-patent or generic drug and gives the Maryland attorney general the power to order the manufacturer to explain the reasons behind a significant price boost as well as request a court order restraining or enjoining a violation.

Gov. Larry Hogan last June allowed the law to go into effect without his signature, citing his concerns about its constitutionality.

The association filed suit in July, challenging the law as unconstitutional. U.S. District Judge Marvin J. Garbis, who sits in Baltimore, dismissed the Commerce Clause challenge, prompting AAM to appeal.

The divided 4th Circuit panel found three factors pointing to the law’s violation of the Constitution’s clause.

“First, the act is not triggered by any conduct that takes place within Maryland,” Judge Stephanie D. Thacker wrote for the majority. “Second, even if it were, the act controls the prices of transactions that occur outside the state. Finally, the act, if similarly enacted by other states, would impose a significant burden on interstate commerce involving prescription drugs.”

For example, “if multiple states enacted this type of legislation, then a manufacturer may consummate a transaction in a state where the transaction is fully permissible, yet still be subject to an enforcement action in another state (such as Maryland) wholly unrelated to the transaction,” added Thacker, who was joined by Judge G. Steven Agee in the published decision.

Dissenting Judge James A. Wynn Jr. said the Maryland statute falls within the state’s “general police powers to regulate matters of legitimate local concern” without violating the Commerce Clause.

“Here, Maryland legitimately targeted generic drug pricing practices specifically designed to prey on the special vulnerabilities of a defenseless group of Maryland citizens,” Wynn wrote. “Simply put the Maryland statute – which applies equally to in-state and out-of-state manufacturers and distributors – does not implicate the concerns that lie at the heart of the Supreme Court’s dormant (state-law generated) Commerce Clause jurisprudence: economic protectionism, discrimination against interstate commerce, and state regulation of streams of transactions that never cross through the state’s borders.”

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